The growing concern over technology transfer, trade and China

In the eighteenth century, England had a virtual monopoly on machines for processing cotton cloth, a leading export industry. The British monopoly ended when an Englishman named Samuel Slater left his home and migrated to America with knowledge of one of the more efficient British machines (the Arkwright water frame). Still known in his hometown as “Slater the traitor”, the technology Slater carried with him ended the British monopoly, giving rise to a powerful new competitor.

This example has particular relevance today. Developing countries have historically used their lower labour costs as the basis for trade advantage. The richer developed countries have relied on their superior technology to offset the competitive advantage of lower labour costs. This is changing.

Leapfrogging Industrialisation

Developing countries have typically industrialised by focusing first on textiles, clothing and products which did not require advanced technologies, moving gradually toward more technologically intensive goods. A few developing countries have been able to leapfrog the gradual process of industrialisation, moving quickly to more advanced technologies.

Singapore was one of the leaders. From an isolated British colony surrounded by jungle, it has quickly moved into the ranks of the developed industrial countries. It used its low-cost efficient labour force and company-friendly political environment to attract multinational firms. These began by producing relatively low-tech products, such as computer chip boards. Within a few years, they began to introduce increasingly sophisticated technology. Today, Singapore is a world leader in electronics and pharmaceuticals. Its per capita GDP is more than double that of Cyprus.

South Korea capitalised on the changes brought about by the Korean war and the exposure to western technology which this introduced, to make a similar jump from a developing to a developed country. Today, it is able to compete on a peer-to-peer basis with the likes of Apple, Hewlett Packard, Ford, Toyota and other international companies.

Following a different path, China promises to duplicate the “leap frog” success of Singapore and South Korea, but on a much larger scale. It has used the attraction of its huge market not only to attract leading international firms, but also to implement a policy of “forced technology transfer”.

Western firms which wish to operate in China have been required to enter into joint ventures with local Chinese companies, not only transferring technology, but also sharing their management expertise with local firms.

The Chinese Challenge

Chinese companies are now poised to export products which are technologically more advanced than their traditional exports. They will compete internationally with products the established industrial countries once considered to be in their own areas of expertise and specialization.

Some 33 different types of electric cars are currently being developed in China, while the country has just produced its first large-scale passenger aircraft. China is already exporting computers, thanks to its acquisition of an IBM subsidiary, and the country is among the leaders in artificial intelligence.

Western governments have belatedly recognised this transformation which is set to increase China’s already massive trade surplus. In the United States, legislation is in process to impede the Chinese strategy of using joint ventures to force technology transfer. According to the Financial Times, this legislation would extend the oversight of the American Committee on Foreign Investment to cover “outbound investment and overseas joint ventures”. A person close to the issue describes the new legislation as a “technology control regime”.

The EU and Japan, together with the US, have recently agreed a joint effort to confront China on the transfer of intellectual property, as well as trade. Governments in the developed countries are also taking steps to provide closer scrutiny and control on the acquisition by China of western companies with key technologies.

In the eighteenth century, Britain had legislation aimed at preventing the transfer of technology which Samuel Slater managed to avoid. Will the current attempts by western powers be more effective or is history about to repeat itself?